Personal Finance Basics Part 1: How Do I Get a Handle On My Money

Are you frustrated about your money? Are you embarrassed that you don’t know how to get a grip on your spending? Are you totally frustrated with not knowing how to invest?

You’re not alone. Most Americans live paycheck-to-paycheck. If you’d like to break that cycle, you’re in the right place. I’ve lived at least some of what you’re going through and there’s hope! If you haven’t read my story, you can read it at Our Story. We’re going to step through this together. Ready to get started?

Financial Independence

I want to start by
giving you a picture of where we’re headed.
A vision of what your life can look like when you have your money under
control. I want to tell you about
Financial Independence or FI. Fi means
different things to different people, but the technical definition is – When
your passive income from sources other than your W2 job can cover your
expenses, you are Financially Independent.

Huh, what does that mean?
What’s passive income? This is
income from a source that does not require you to do work. This means you’re not trading your time for
money like you do at your W2 job. These
sources fall into 3 categories.

Dividends
or Interest from investments like stocks or your 401k or IRA

Income from
a side job like an online store or a side business you own

Rental Real
Estate.

These are things that make you money even while you
sleep. Some folks have become
Financially Independent with investments only or rental real estate only and
some have a combination of all 3. It’s
your choice.

How Much Do I Need?

So how much money do you need to become FI? That’s up to you. The easy way to calculate this is to look at how much money it takes for you to live now. We’re going to talk through how to come up with that number in a future post. When you know how much you spend in a year, then that number is plugged into a formula. This formula is generally called the 4% Rule of Thumb. Don’t worry, it’s easy.

The 4% Rule (of Thumb)

The 4% Rule, for short, says that you can withdraw 4% of your
investments each year and still maintain your principal over time.

Total Investments x 4% = Annual
Income

Another way to calculate it would be:

Desired Annual Income x 25 = Total
Investment needed

For example, if you need $40,000/year to cover your expenses
in retirement, you will need $1,000,000 in investments.

Woah! That’s a big
chunk of change!

It might sound like a huge amount right now, but I can tell
you that with the right tools AND the right mindset, this is totally
possible.

Where Do We Begin?

The best place to begin is by evaluating where you are. Do you know how much debt you have? I mean Total Debt. You may have never added up your total
debt. It may be too scary. You may feel like you’ll be judged by your
spouse, friends or family.

It may not by pleasant, but this is where we need to
start. Pull out everything you owe and
add it up. This will include:

car loans

student loans

mortgage (if you have one)

credit cards

loans on toys like boats, 4-wheelers or jet skis

Hold on to your total debt number and we will use in the exercise in Part 2 – Your Net Worth Statement.

Assignment and Key Takeaway

Assignment 1 – Calculate your Total Debt.

Assignment 2 – Make a list of “10 Things That Make Me Happy”. Take some time to think about this. If you could plan your “perfect day”, what would it include? Who would you spend it with? What would you do? Cook a gourmet meal, go on a hike, take a road trip, eat chocolate? It can be anything. Think about what lights you up.

Key Takeaway – Don’t be afraid to take a good look at your debt. The first step in gaining control of your money is to access where you are right now.

Looking Ahead

In Part 2, we’ll look at How to calculate your Net Worth. Until then, Assignments 1 and 2 are your homework. See you next time!

5 thoughts on “Personal Finance Basics Part 1: How Do I Get a Handle On My Money”

Hi Becky! I just heard your excellent interview on the ChooseFi podcast – you were terrific. What an inspiring story! I had the pleasure of meeting your son Stephen and his wife at FinCon. I love what you said about your family values and Jr. certainly practices those values now. Amazing to see. I just wanted to congratulate you on your success and wish you luck with your blog. All the best!

I am listening to your podcast right now on FI. It is nice to hear stories from older folks. I’m 56 but a very young 56. I do have “retirement” funds but I’m way, way behind ($200K). I work for a nonprofit so my salary is pretty low ($54K), and I’m a divorced, single parent who lives with my 16 year-old daughter in a house I own ($129K mortgage). In addition to my mortgage I have $1K in credit card debt. I have $700 in savings, which I may apply to my credit card debt or may leave in my high interest savings account.

So my daughter will be off to college in a couple of years and my peak earning years may have passed (I hope not). I am very frugal and save but I am feeling without greatly increasing my salary it’s going to continue to be an uphill battle to save enough to have options. I say “have options” because I don’t believe in retiring in the traditional sense, but I want to be independent and I want to have the means to keep traveling.

I know you are not a financial expert but if you have any ideas for how I can get started, I would love to hear them. Thank you!